Outsourcing Contracts: Considerations When Preparing to Renegotiate an Outsourcing Contract

Most outsourcing arrangements will be renegotiated during their term. These renewals and restructuring constitute a significant and growing portion of the outsourcing market, especially in the more mature arenas such as the United States and United Kingdom. In some cases, such renegotiation activity is driven by a change in service scope requirements or in volumes to be consumed. In others, the approaching end of the original term will encourage the client to seek refreshed and improved contractual conditions. More often than not, the client will also be seeking better prices. Though restructuring doesn’t necessary indicate dissatisfaction with the sourcing relationship it is a common driver, with most companies reporting that they receive less value than expected, often because their expectations were unrealistic to start with.

These interventions can take many forms. A remediation is usually a highly targeted or tactical action focused on resolving specific issues in the relationship or with the service delivery, and may or may not result in changes to the contractual terms. A restructuring is normally a wider engagement aimed at changing the shape of the deal, such as the scope, quality level or price of the services. These events typically occur mid-term and result in contract change. Most extreme in terms of impact and complexity are renewals. These events usually occur as the end of term approaches, as the client takes the opportunity to seek a fundamental transformation in the way that services are sourced and delivered, or seeks to adapt the operating model to major changes in the business strategy. Some renewal processes will be competitive, with service providers other than the incumbent are invited to participate, but all result in a wholly refreshed contract.

A successful renegotiation will require careful preparation. The relationship and the performance of the service provider will need to be assessed, and the contract will need to be read carefully so that all rights and obligations are understood in detail. The financial will need analysis, and various outcome scenarios should be modeled and valued in advance of discussions with the provider. This ISG white paper discusses additional practical considerations that are paramount when preparing to renegotiate an outsourcing contract.